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Behavioral and personnel economics

Articles in behavioral economics discuss the emotional and cognitive factors that influence the decisions of actors, in particular employers and employees. Personnel economics analyzes the internal organizational strategy of the firm and the human resource management practices chosen to pursue that strategy.

Business consulting and supervisory skills
training can improve firm productivity and labor relations

Productivity differences across firms and
countries are surprisingly large and persistent. Recent research reveals
that the country-level distributions of productivity and quality of
management are strikingly similar, suggesting that management practices may
play a key role in the determination of worker and firm productivity.
Understanding the causal impacts of these practices on productivity and the
effectiveness of various management interventions is thus of primary policy
interest.

Greater representation of women may better
represent women’s preferences but may not help economic performance

Women's representation on corporate boards,
political committees, and other decision-making teams is increasing, this is
in part because of legal mandates. Evidence on team dynamics and gender
differences in preferences (for example, risk-taking behavior, taste for
competition, prosocial behavior) shows how gender composition influences
group decision-making and subsequent performance. This works through
channels such as investment decisions, internal management, corporate
governance, and social responsibility.

Rewarding only one dimension of performance may
result in employees ignoring other dimensions

To align employees’ interests with the firm’s
goals, employers often use performance-based pay, but designing such a
compensation plan is challenging because performance is typically
multifaceted. For example, a sales employee should be incentivized to sell
the company’s product, but a focus on current sales without rewarding the
salespeople according to the quality of the product and/or customer service
may result in fewer future sales. To solve this problem, firms often
increase the number of metrics by which they evaluate their employees, but
complex compensation plans may be difficult for employees to understand.

Giving workers control over their working hours
increases their commitment and benefits firm performance

Allowing workers to control their work hours
(working-time autonomy) is a controversial policy for worker empowerment,
with concerns that range from increased shirking to excessive
intensification of work. Empirical evidence, however, supports neither view.
Recent studies find that working-time autonomy improves individual and firm
performance without promoting overload or exhaustion from work. However, if
working-time autonomy is incorporated into a system of family-friendly
workplace practices, firms may benefit from the trade-off between (more)
fringe benefits and (lower) wages but not from increased productivity.

Giving employees more discretion at work can
boost their satisfaction and well-being

A wide range of high involvement management
practices, such as self-managed teams, incentive pay schemes, and
employer-provided training have been shown to boost firms’ productivity and
financial performance. However, less is known about whether these practices,
which give employees more discretion and autonomy, also benefit employees.
Recent empirical research that aims to account for employee self-selection
into firms that apply these practices finds generally positive effects on
employee health and other important aspects of well-being at work. However,
the effects can differ in different institutional settings.

CEO pay, often contentious, is the product of
many forces

The escalation in chief executive officer (CEO)
pay over recent decades, both in absolute terms and in relation to the
earnings of production workers, has generated considerable attention. The
pay of top executives has grown noticeably in relation to overall firm
profitability. The pay gap between CEOs in the US and those in other
developed countries narrowed substantially during the 2000s, making top
executive pay an international concern. Researchers have taken positions on
both sides of the debate over whether the level of CEO pay is economically
justified or is the result of managerial power.

Comparisons to others’ pay and to one’s own past
earnings can affect willingness to work and effort on the job

Recent studies show that even irrelevant
relative pay information—earnings compared to the past or to
others—significantly affects workers’ willingness to work (labor supply) and
effort. This effect stems mainly from those whose pay compares unfavorably;
accordingly, earning less compared to others or less than in the past
significantly reduces one’s willingness to work and effort exerted on the
job. Comparing favorably, however, has mixed effects—with usually no effect
on effort, but positive or no effects on labor supply. Understanding when
relative pay increases labor supply and effort can thus help firms devise
optimal payment structures.

Family firms offer higher job security but lower wages
than other firms

Family firms are ubiquitous in most countries. The
differences in objectives, governance, and management styles between those firms and
their non-family counterparts have several implications for the workforce, which
scholars have only recently started to investigate. Family firms offer greater job
security, employ different management practices, have a comparative advantage to avoid
conflicts when employment relations are more hostile, and provide insurance to workers
through implicit contracts when labor market regulation is limited. But all this also
comes at a cost.